When the CEO Leaves, Do Others Follow?
STANFORD GRADUATE SCHOOL OF BUSINESS—In a business environment where heads of companies are increasingly held accountable for performance and boards are willing to use their muscle to push them out, CEOs are being handed pink slips more frequently than ever before. So what does that mean for the rest of the company's top executives? Can they perform as successfully with a different CEO? Does it mean the rest of top management will also turn over?
It may seem intuitive that top executives would pack their bags along with the CEO, but whether the whole executive team leaves depends on how long both the incoming CEO and the top executives have been at the firm. So says Paul Oyer, an associate professor of economics at the Stanford Graduate School of Business.
In general, "when one person leaves other people are likely to leave," says Oyer. But the probability of turnover soars when the new CEO comes from another firm. "When an outsider takes over a firm, that really has a big effect on the top management. When an insider moves up, you don't see nearly as much overall cleaning of house. Relationships within those groups mean something."
In a research paper by Oyer, Rachel M. Hayes, associate professor of accounting at University of Chicago's Graduate School of Business, and Scott Schaefer, an associate professor of management and strategy, the researchers show
The probability that a top manager will leave if the CEO departs and is replaced by another internal top manager is nearly 15 percent. That number doubles to 30 percent if the new CEO is from outside the firm. The likelihood of senior management turnover also depends on how long the CEO and the top executive have worked together. A top manager, for example, who is relatively new to the firm is less likely to depart when a CEO departs. Relationships—not corporate boards, strategy shifts, or losing out on the promotion—drive turnover.
While the connection between CEO and top-level management turnover is not entirely new, this is the first time researchers analyzed hard data on executive compensation and on Fortune 500 firms' layoff announcements to explore theories of relationships among top managers.
What really matters when it comes to turnover, the researchers discovered, is how much the CEO and a top-level executive have invested in their relationship. Consider, for example, a senior executive who has been working with the CEO for years. The two have developed a shared jargon and an understanding of each other that makes overcoming crises and decision-making easier and quicker. Because of the investment they've made in their working relationship, they are more productive working together than with others.
The researchers call this a "complimentarity" between a CEO and manager. (Think of the old adage: "the whole is greater than the sum of the parts.")
So if the CEO departs, where does that leave the manager? Less productive—and less valuable to the firm. "Executive A is more productive if executive B is there," says Oyer. "If executive A leaves the firm, then executive B's value to the firm has gone down. He might leave the firm because outside opportunities look more attractive or because without executive A, the firm decides he's not worth what he used to be."
The rate of turnover therefore is highly correlated to the length of time both the top executive and incoming CEO have been with the firm. If, for instance, the manager has been with the firm for a long time and if the incoming CEO is either new or from another company, the turnover rate increases significantly. In this case, the executive who remains behind has lost much of her value to the firm since she went from working extremely well with the old CEO to knowing very little about how the incoming CEO operates.
On the other hand, if the remaining executive is relatively new to the firm, he has little working relationship with either the old CEO or the new CEO. When the CEO changes, he has neither lost nor gained value and so is less likely to be affected.
To be sure, the researchers point out, relationships are not always built over a long period. In some cases the probability of turnover could simply be a question of whether the new CEO and top manager click. The researchers call this idea "matching up front"—or spending time at the outset figuring out whether they can effectively work together. It might not matter, for example, if a new outside CEO doesn't have a relationship with a top manager. It may just be that they have different operating styles and therefore the non-CEO is forced to leave.
Either way, the driving factor in turnover remains interpersonal relationships, the researchers stressed. Their research suggests, for example, that changes in firms' strategies are not a primary cause of top management turnover. "The way they do business is important, not necessarily what kind of business they're going to do," says Oyer. The data also suggest that, while boards might throw out a bunch of top managers when a firm's performance lags, this is not a primary factor driving the connection between CEO turnover and departures of other top managers.
Another theory set straight: top managers who don't get the CEO promotion aren't always handed their walking papers. Yes, Jack Welch in his book Jack: Straight from the Gut, chronicled how most of the top management was forced out of GE after he hand-picked his successor. But says Oyer, "the GE experience is the exception to the rule. Usually there is more stability when an insider takes over." The reason? The top managers who lost out on the promotion still have a valuable relationship with the new CEO and the other competitors. Therefore, they are more valuable at the original company than elsewhere.
Co-Worker-Specific Investments and Stability of Top Management Teams
Rachel M. Hayes, Paul Oyer, and
Stanford Research Paper No. 1846, 2004
CEO Succession 2002: Deliver or Depart
Chuck Lucier, Rob Schuyt, and Eric Spiegel
Booz Allen's Strategy and Business magazine, Summer, 2003
Passing the Baton: Managing the Process of CEO Succession
Harvard Business School Press, Boston, 1987